The Great Stagnation for College Graduates

Michael Mandel presents an arresting chart on the decline in real earnings of young male college graduates over the last decade, and writes,

no one has given me a good explanation yet of why young American college grads should have been hit so hard. Is there increased competition with young college grads around the world? Are new college grads lower quality than their predecessors? Has information technology reduced the need for young grads? I really would like to know.

1. My daughters attended college during this period, and what I saw among them and their friends was a strong resistance to business. My lament is that I would like just one of my daughters to want to work for a profit.

I don't know whether the anti-business ideology at colleges became stronger in the last decade--it's something that has been there for decades. But it's possible that it had a stronger effect. Steven Jobs' Stanford graduation speech struck a chord in part because it plays to this "I don't have to sell out and work for The Man" mindset.

2. I wonder how much earnings of recent college grads can be skewed by some unusually lucrative opportunities. I am thinking of the Internet sector in the late 1990s and the financial sector until 2008. Remember when just about any Ivy League grad could get a job on Wall Street if he or she wanted it? If those opportunities were unusual, then what we are seeing is in part a reversion of the mean to the median.

3. Some college graduates are starting to lose the race against the machine and to be affected by the Great Factor-Price Equalization.

4. There is some effect from the changing gender mix at colleges. Off-hand, I cannot think of a reason that the decline in the relative supply of male college graduates should reduce their wages, but there must be some plausible just-so stories one can contrive.

5. The rising cost of health insurance, which makes health insurance the most important cost component in hiring. It could be that with employer-provided health insurance, young single workers tend to subsidize older workers with families. The result is that younger workers are bearing the brunt of higher health insurance costs, and so they are absorbing the largest decline in earnings.

Comments and Sharing

Tyler's fifth point is incredibly important for the declining wage and salary share of national income, so I'm guessing it's relevant for this as well.

Do you know if "earnings" means "wage and salary" or if it is all compensation? If it's not all compensation, that would probably be an important thing to see.

The other interpretation is simply that in what Goldin and Katz called "the race between education and technology", the standards for education are just getting higher. I am guessing that graduate wages are not behaving this way. I'm working on a chapter on the engineering labor force and one of the things I'm doing is tracking graduate wage premia and the response in the production of graduate students. It's high and students are very responsive to the incentives (predictably). Annual production of graduate level engineers have more than doubled in the last three decades while four year degrees have stayed pretty stable. Human capital requirements are getting higher - that's not necessarily a bad thing.

Of course, the caveat that I always have to add with that point is that there are a range of skill requirements and a lot of people would be able to cope with changes in the structure of the economy better if we had a more robust trade school, technical education, and apprenticeship system in this country. High skills are not just for graduate students.

Just looking at the plot suggests to me that your idea #2 is the dominant effect over this period of time. The short-term (few years) fluctuations correlate well with the behavior of the overall economy, with the peaks coming at the height of the dot-com bubble and the run-up to the financial crisis. It's true that the second peak occurs a couple of years before the "big crash", but that seems consistent with other indicators showing economic problems ("fore-shocks"?) leading up to that event.

There may or may not be a secular trend here as well. Fitting a straight line to the graph would show a decline of around 10% from 1999 to 2010 (fit by eye; I haven't actually digitized the plot and done the fit properly). That's about half the full range from the peak in 2000 to the lowest point in 2010.

Daniel Kuehn notes that the original poster doesn't tell us whether we are looking at raw wages or wages plus benefits. If it's the former, I'd guess that rising health insurance benefits have offset a large part of the decline in wages. We could then argue over whether or not there has been a real loss of living standards.

The original poster also doesn't tell us whether the plotted data include people who don't have regular jobs (maybe they're in grad school?).

Another missing piece of the puzzle is the mix of educational backgrounds. Has there been a shift from more-productive to less-productive fields? If so, it could be interpreted as support for your idea #1. It would be interesting to have a set of plots for, say, engineers, scientists, and humanities grads separately. It's possible for the wages of all groups to be rising, while the wages of the average grad are falling as the mix among these groups changes.

As Michael Mandel notes, there could also be changes in the quality of the grads. The long-term reduction in the number of hours spent studying, and the increase in the fraction of people getting college degrees, both suggest that we should expect to see a secular decline in their average ability.

In short, it's hard to draw any solid conclusions based on these graphs alone.

I'd go even further than other posters; Mandel's charts are useless. 2000 (the tenth year of an economic expansion, unprecedented) is a lousy year to use for comparison. Newspapers in the late 90s were full of stories of the wild job market where people were allowed to bring their infant children and/or pets to work with them. 2010...not so much.

College graduates are not created equal. You'd need breakdowns by, at least, choice of major and quality of institution.

I posted something like this on Marginal Revolution but think it worth repeating here: people do not emphasize, or emphasize as much as they should, student choice in college majors and how that affects earnings and post-graduate opportunities. I wrote a post on Student choice, employment skills, and grade inflation observing that colleges and universities are, to some extent, responding to student demand for easier classes and majors that probably end up imparting fewer skills and paying less. To what extent can changing major composition account for earnings compositions?

From what I've observed, even naive undergrads "know" somehow that engineering, finance, econ, and a couple other majors produce graduates that earn more and have better job opportunities, yet many end up majoring in simple business, comm, and other fields not noted for their rigor. As such, I wonder how much of the earnings picture in your graph is really about declining wages and how much of it is about people choosing majors that don't really impart job skills of knowledge (cf Academically Adrift, etc.) while leaving plenty of time to hit the bars on Thursday night.

In The Marketplace of Ideas, Louis Menand shows that close to a quarter of all undergraduate degrees are in business, so I'm not sure the anti-business bias is as pronounced as you describe. It may be that such a bias is most obvious in prestigious schools.

I wonder whether the earnings picture in these graphs is for real. What is this? -- looks like the average earnings of all bachelor's holders aged 25 to 35, or thereabouts. That is, 10 one-year cohorts lumped together.

But how can the earnings of so many people be so unstable year to year? Entry into and exit from the group has to be small, relative to the size of the group.

I'm thinking these data are worthless, and perusing them a waste of effort.

Regarding #1, I think that making a profit is very challenging and requires sacrifices in terms of comfort and leisure. There are few cultural cues, outside of family, for American teenagers to think "I want to go into business". When I was an engineering freshman at 18, I recall trying to talk a liberal arts peer out of applying to the business school. It seems odd to me now, but it made sense at the time as I thought he would be going to "the dark side".

At that point, I was already politically and philosophically libertarian, and my preference for free markets stemmed more from civil rights than economics. So I should have been ripe for the plucking, but it still took until well through or even after undergrad to appreciate the economics of prosperity.

What we need are historical charts showing earning power versus degree, broken down by type.
Are chemical engineers, oil field engineers, and electrical engineers really that far down?
How about over the time period starting in, say, 1980, instead of at the end of the dot-com boom?

Was it Bryan Caplan who suggested that technology has out-paced labor skills? I think there is a lot of sense in that explanation.

I also see a lot more competition from students in developing countries. Top-tier universities are hand-picking some of the best students from around the world and offering them free-ride scholarships. Naturally, these gifted students go on to be hand-picked by top-tier job recruiters. Even a straight-A student from North America can't compete with that unless he/she has some personal back-story that is equally as attractive to university recruiters as someone coming from a developing country.

Recruiting "bias" might be another explanation. (It's not really bias, though, because these kids invariably make the best students and best employees.)

I think the supply and demand issue is important--too many college grads entering the workforce each year and not enough demand for their skills. The 90s were almost certainly anomalous, giving a false indication of the number of college graduates that the economy could accommodate. But I also think the quality issue matters a great deal. The average college graduate lacks strong analytical skills and writes poorly. Writing that would have earned a grade of C thirty years ago (and a D forty years ago) now typically earns a B. I would not be surprised to find that employers have recognized a drop in the overall quality of graduates, with the result that the signaling aspect of a degree has weakened. That is, employers look for other evidence than merely a degree to signal that a recent grad is "educated" and thus competent. This would mean that students with degrees in more demanding fields should be more desirable, as well as students from more prestigious universities (because they had to demonstrate earlier achievement simply to get admitted). Under these circumstances, I would expect the premium to remain intact for the top half of all college graduates, but for it to disappear for the bottom half.

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